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How mortgage insurance can protect your family
Singapore is one of the top countries in the world when it comes to home ownership, with more than 90% of its resident households owning their homes1.
Buying a property is undeniably an exciting milestone in many of our lives, but it comes with significant financial responsibilities – the biggest of which is a mortgage loan. With homes in Singapore costing at least a few hundred thousand dollars for an HDB flat and possibly a million dollars or more if you buy a private property, most homeowners will require a mortgage loan to finance their purchase.
For the majority of homebuyers, this mortgage loan is likely the largest financial commitment they will take on in their lifetime, spanning two to three decades.
Protecting your home with mortgage insurance
If your home is the biggest financial asset that you are going to own, then it only makes sense for you to protect it financially against adverse circumstances that may occur.
For example, you would buy home content insurance to guard your home against a fire or a pipe burst that may destroy the value of its contents, such as your furniture, belongings and renovations.
Similarly, you also need protection against the mortgage loan you have taken, especially since the loan is collateralised against the property that you purchased. This means that if you are unable to meet your loan obligations for whatever reason, the financial institution that lends you the money has a claim against your home and can initiate foreclosure to recover the debt.
Unfortunately, there are many adverse circumstances in life that are beyond your control that could prevent you from repaying your mortgage loan. This includes total and permanent disability (TPD) or death.
If any of these occur, not only would your family suffer, both emotionally and financially, during this difficult period, they may also risk losing the roof over their heads. This is the last thing that anyone, including the financial institution you borrowed from, would want to happen.
This is why most homeowners are encouraged, or even required, to get a mortgage insurance when taking a mortgage loan.
Mortgage insurance takes care of your loan if any insured events, such as total and permanent disability or death, occur to the homeowners. Mortgage insurance is unlike home content or fire insurance, which covers the asset within our home or the property itself, but not the loan taken to purchase the property.
Types of mortgage insurance you can consider
Those buying an HDB flat and using their Central Provident Fund (“CPF”) savings to pay for their housing loan must either be covered under the Home Protection Scheme (“HPS”) that CPF offers or apply to be covered under private mortgage insurance from a bank. Private property owners are not eligible for HPS but can still sign up for mortgage insurance from a bank.
In both cases, the insurance premiums are determined by the borrower’s age, gender and health conditions, as well as the sum assured, which decreases over time as one’s outstanding mortgage is progressively paid off, and reduces to zero when the policy term is up. But what are some notable differences between the HPS and private mortgage insurance?
#1 Payout of sum assured
If an event occurs that one is covered for, such as TPD, HPS automatically clears off the outstanding loan on the HDB flat or the percentage for which the homeowner is insured for. If the remaining loan on an HDB flat is S$200,000, HPS will clear the loan if the insured is covered for 100%, or S$100,000 if the owner is insured for 50% of the mortgage loan.
On the other hand, private mortgage insurance provides a lump-sum payout to the policyholder or his/her surviving family members, and they can choose how to deploy their insurance payout. For example, the surviving spouse may prefer to use part of the payout to fund their kids’ education while continuing to service the mortgage loan each month.
#2 Scope of Coverage
HPS covers you, by default, for the total value of your mortgage. Homeowners under HPS must be covered for at least the proportion of the monthly housing instalment they pay. For instance, if you are paying 80% of the monthly housing instalments, with your spouse paying the other 20%, you must be insured for 80% of the loan and your spouse, the other 20%.
Private mortgage insurance plans, on the other hand, allow you to choose your sum assured, up to the amount of your housing loan. If you choose to be covered for less than your mortgage amount as you wish to pay lower premiums, you may do so. You also have the option of buying individual policies or a joint policy that would provide a payout upon the death of either party.
Homeowners with existing health conditions may also be able to sign up for a private mortgage insurance policy that comes with exclusions on their pre-existing conditions. On the other hand, HPS only “approves” or “declines” one’s HPS application and does not provide coverage with exclusions.
#3 Calculation of premiums
For private mortgage insurance policies, your premiums are calculated based on your age and health conditions at the point of application. Subsequently, if you were to change your property, you can continue to be covered under the same policy.
In contrast, for HPS, you will need to re-apply for a new policy each time you move to a new property. You should be aware that your premiums for HPS policies may increase as you grow older. You may also be ineligible if you have health conditions that preclude you from getting your HPS coverage if you re-apply after buying a new HDB flat.
#4 Ability to pay for premiums using CPF Ordinary Account savings
HPS allows you to pay for the premiums using your CPF Ordinary Account (CPFOA) savings, while you have to pay for private mortgage insurance premiums with cash. However, do note that your funds in your CPFOA earn you a risk-free interest return of 2.5% p.a., which is more than the interest you earn from most regular savings accounts.
Mortgage insurance protects the most important asset that you own
Besides being the largest financial commitment you take on, the home that you live in is also the most important asset that your family would need.
If you are healthy and able to work, you can provide for this home that they live in. However, if that changes, a mortgage insurance policy will provide both you and them the peace of mind, knowing that the family home will continue to be theirs no matter what.
This article was written by DollarsAndSense.sg and is reproduced by UOB with the consent of DollarsAndSense.sg. All views expressed in this article are the independent opinion of DollarsAndSense.sg
